Ann: 30 June Business Update, page-2

Have been accumulating these for a while. Will share some more detailed research in time, but a general summary below.

I view the business in two parts: the core business of sleep and neurological diagnostics and the medical innovations division. My reasoning for investing is purely based on the core business as it has now been turned around as is positioned for growth, with (potentially a lot of) upside from the medical innovations side. Some of the numbers are also blurred because of these two divisions, which is why CMP have been breaking the figures down in recent presentations and I’d expect them to keep doing this.

FY14: $30m Revenue, $3m EBITDA, $0.9m PBT. $800k of R&D is actually amortisation of the SomniLink SPAP device (non cash expense) with 3-3.5 years before being fully written off. Cash R&D expense is $800k lower than reported in the accounts. Its fair to back this out of the numbers for the core business.

FY15 is where the business really looks cheap. Revenue growth should exceed 10% as a minimum, gross margins will expand with the transition of their highest volume product offshore (and more products after that), R&D will remain steady as indicated in a few presentations back and eventually fall closer to 10% of R&D with revenue growth.

On my figures (dyor of course) I’m expecting around $4.5m EBITDA in FY15, and ~$2.5m PBT, or >$3m when you back out the $800k non-cash amortisation expense. This on a market cap of $18m. So potentially FY15 normalised PE of around 7-8, well below market comparables. Upside from weakening AUD.

Look at comparables like AZV and SOM. SOM in particular is guiding for $2-$4m in EBITDA in FY15 while on a market cap of >$90m. This compares to CMP who did $3m EBITDA in FY14 and should do at least $4m (conservatively) in FY15 but with a market cap of $18m, 1/4 that of SOM. And when you look at the quality of the businesses CMP may actually rate higher, more IP, stronger market positions, upside from the value of additional technology. This is nothing against SOM which I believe is a good business, just to highlight the valuation discrepancies between CMP and SOM.

Still work to do by management, as is always the case with any company, but the numbers here make CMP worth a close look.